May 19, 2016 - 10:19
As an investor, the most important skill to have is knowing how to accurately evaluate a property. Buying low and selling high is the only way to profit and keep the business going. 9 out of 10 times you will come across sellers that ask for much more than what their property is really worth. But since you are not, and should not, buy for retail price then it is crucial that you understand why you are offering a certain price and be able to back up your claim with numbers and proof. A lot of times I get asked, “why don’t you just use other experts like an agent or an appraiser to evaluate the property?” The answer is, if you are going to be evaluating at least 5 properties a month, it could be inconvenient for the agent and expensive with an appraiser. Although, having an appraiser or agent on your team can be great help for you at times, you don’t always want to depend on others estimations or numbers in order for you to make a decision.
This is a quick guide to evaluating a property after repair value for residential homes (ARV) and for experienced investors sometimes this is all they need in order to make a decision but if you are an inexperienced investor or new to the neighborhood this might be a good starting point to get things going, eventually you could gain help from other professionals.
1. Gather information on subject property
It begins with the subject property, the property you are trying to estimate a value for to make an offer. It could be a property already on the MLS, or an owner that wants to sell directly to you or it can also be your rental property that you have decided to sell. The key to this step is to gather information for the property because then you will be comparing it to others. If the property is on the MLS, then it will be easier to gather this information, just search the property and websites like Zillow or Google can help you. If not, then most of the information can be found on the local tax assessor website.
Here is a quick list of information to gather.
-Inside or outside city limits?
-Proximity to attractive amenities or the opposite
-Size (sq ft)?
-Corner or interior lot?
-Mature or Non-Existent Landscaping?
-Size (sq ft)?
-Number of bedrooms, bathrooms?
-Type (house, condo, townhouse..etc)?
-Materials for flooring, countertops, walls..etc?
Most of the time you will want to check the home for your self, it will help in determining the condition of the home and if there is any potential in profits.
2.Gather information on comparable properties
Once you have information for the subject property now you need to search for the best comparable properties (Comps) that have been sold. The best source will always be the MLS Multiple Listing Service, this is used by realtors and brokers when comparing properties. If you are not a real estate agent yourself then it would be very helpful to get one on your team that is willing to send comps regularly. Some of you will not have access to the MLS to start off with so the lack of it might be motivation for you to get a real estate license. If not, there are still a few sources that you can use to make a good guess like Zillow.com.
Once there, there will be a few filters you will need to apply in order to get good comps.
Sold Properties: Make sure that you are only looking at properties that have been sold within the past 3-6 months.
Same Location: For suburban properties, this often means the same neighborhood. For urban or in-town properties, it might be the same block or district. Most of the time, simply doing a search on the same subdivision or zip code might be all you need, but make sure the distance from the subject home is not more than 5miles.
Same Size: Square footage should be within 15-20% of the subject property.
Non distressed: Since you are trying to figure out what the home will sell for once it is fully renovated, look at homes that have the same type of characteristics and conditions as the home you envision. Look at images of the comparables and see the list of details that comes in the home.
Same number of beds and baths: There are only so many bedrooms and bathrooms you can fit in a home, so usually when seeing a home with the same square feet of the subject home it will have the same number of bedrooms and bathrooms but it is always good to double check.
Try to have at least 3-5 good comps, and it would be even better if you can drive by the neighborhood to see the condition of the neighborhood and get a good sense of it.
3. Compare comps to estimate value
Now, with the comps you have you will be comparing it to the subject property. Check the lists of the details from the subject property like the square footage; number of bedrooms and baths, and it is also good to check the price per square foot that sold for the home. Pull out the 3 closest comps to the subject property and compare, look at the way it was made constructed and the materials that are made of. For example check if the countertops are granite or vinyl, see the type of wood flooring used, and look at the most important room in the home, which is the kitchen. If you have 3 comps that are very similar to the subject property then it would be good to average out the sold price for those homes but always make sure that they are all updated in renovations. For example, the ARV for one is $208k, second is $215k and third is $219k then your average should be between $205k-$220k. So now depending on how fast you want to sell it then you will decide the price, remember that the lower the price the faster it will sell and the higher the price then the longer you will have it listed for depending on the market.
If you are buying rental properties, you can use this quick and dirty formula to make sure you don’t overpay. In the end, the entire point of the process was to get you to a rough estimate of value more quickly and less expensively than alternative valuation methods. It will be your job to figure out how and when to use it in your investing business.